OPINION: Eye-catching figures belie nuances of Farnborough deals

By Sophie Segal2018-07-20T15:27:46+01:00

After last year's intolerable heat in Paris and Farnborough 2016's rainy deluge, the forecast for this year's major air show was sunny skies and mild temperatures – and for the most part the weather held up. The deal announcements, meanwhile, reflected the weather – the OEMs shone a bright light on them, but the nature of many customers' commitments was mild.

The show felt quieter than previous years; even the chalets were not teeming with bodies. Yet the airframers surpassed the past five years, with firm-order, tentative-commitment and option announcements aggregating to nearly 1,500 aircraft – a number exceeded only at Paris in 2013.

But can the OEMs really declare victory? Their success or otherwise is not encapsulated by that one figure.

Only 27% of the 1,500-odd total is accounted for by firm orders (and half of those appear to have been booked previously without identification of the customer). Tentative commitments may well be firmed at a later date, but for now they are materially different from the decision to lock in a date and price for the aircraft with a contract.

LESSORS TAKE THEIR SHARE

Where lessors stole the show at Paris last year, accounting for nearly three-quarters of the aircraft covered by the airframers' announcements, the balance between airline and lessor firm orders was perhaps more rational at Farnborough, in terms of reflecting make-up of the global fleet.

Prior to the air show, Airbus and Boeing had a collective backlog of 8,206 jets through 2023 (of which lessors accounted for 22%).

Lessors own about 42% of the global fleet today, according to Flight Ascend Consultancy.

At this year's Farnborough, airlines accounted for about two-thirds of the firm orders and lessors the other third.

Lessors like Jackson Square Aviation and Goshawk placed first-time speculative orders after growing their portfolios initially through sale-and-leasebacks, which have become increasingly untenable as competition squeezes margins.

In fact, Flight Ascend Consultancy says that sale-and-leasebacks have slowed from about a 20-25% share of annual financings to 15% in January-May 2018, implying an exodus from lessors who just can't make the returns work.

Historically, lessors have grown their fleets via direct OEM orders and sale-and-leasebacks in roughly even balance, with a slight tilt toward the latter.

But it appear that given the squeeze in this market, lessors may be feeling pressure to make speculative orders to try to seize back control of their pricing.

RATIONALITY PREVAILS

What appeared unusual about the week is that while the OEMs had an announcements bonanza, airlines actually showed restraint. This reflects partly the blockbuster orders of previous years, but also uncertainty about when to expect the inevitable next downturn.

Already the industry is nearing a record-breaking ascent in the cycle. Carriers simply seemed shy to lock in slots further into an ambiguous future.

Looking at Farnborough's numbers in isolation, it's hard not to be cynical about Airbus's and Boeing's victory laps, given firm orders' 27% share of activity recorded in FlightGlobal's order tracker.

In fact, nearly half of the announced firm orders were big reveals about previously unidentified customers, while 30% of the aircraft covered by publicised deals related to unidentified customers.

"At the end of the day, the money's at the bank," Airbus chief commercial officer Eric Schulz insisted during the show. "So disclosed, undisclosed, that doesn't make a lot of difference. The order is there. That's it."

Schulz suggests that concerns over US trade policy contributed to customers' reluctance to be identified.

Still, the lack of firm orders – be they disclosed or undisclosed – does not affect the reality that the airframers are in better shape than ever in terms of their backlog. Both Airbus and Boeing have orderbooks running well into the next decade.

"With the single-aisle orderbook so full, I would expect firm orders to start tapering off, and I think the industry needs it to taper off," Air Lease chief executive John Plueger tells FlightGlobal.

"The supply chain is struggling to cope with existing production rates and, right now, Airbus and Boeing want to ramp up."

Air Lease committed to 79 Boeing aircraft on Day 2 of the show. The US lessor has secured slots from 2020 through 2024, but says that most of the deliveries as weighted in the back-end of that timeframe.

"It's difficult for lessors to make commitments that are beyond five years in the delivery cycle," Domhnal Slattery, chief executive of Avolon, told FlightGlobal during the air show. Avolon, the third-largest lessor in the world by book value, did not announce any deals at Farnborough, after committing to over 150 Boeing Max jets at Paris last year.

Signing firm orders six, seven, eight years in advance could be a financial misstep for customers. Not only would customers be exposed to escalation over that period, during a time of inflation uncertainty, but there is no way to predict where the industry will be in the demand cycle. Already it is enjoying an unusually long upswing.

"If we continue to see above-average growth sustained through 2024, then all historical records will have been smashed," says Rob Morris, head of Flight Ascend Consultancy. "I think this is an extremely unlikely scenario, and thus orders placed for delivery in that timescale seem to me to carry high uncertainty."

And, while passenger traffic continues to grow, fuel and interest rates are rising too. According to IATA, the industry has likely passed the peak in airline profitability, suggesting downward pressure. There is also the geopolitical uncertainty that comes with the worsening US-Chinese trade relationship.

The airlines, for once, are being rational.

Although the flurry of announcements suggests excitement, the actual firm orders booked at Farnborough point to a stable backlog – with contracted growth into the next five years – and to rational customers cautiously planning for an uncertain future.

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